Continued move to indexing, target-date funds fuels growth
A year after Vanguard took over as the largest manager of mutual funds for defined contribution plans, the manager significantly widened its advantage, according to Pensions & Investments' latest survey.
Vanguard Group Inc., Malvern, Pa., reported $608.5 billion in proprietary mutual fund assets for U.S. defined contribution plans as of June 30, up 7.1% from a year earlier and distancing itself from Boston-based Fidelity Investments, which reported a 6.5% decline.
However, with $494.3 billion mutual fund assets as of June 30, Fidelity still occupied the No. 2 spot, comfortably ahead of the next-closest managers.
Kevin Jestice, principal and head of institutional investor services at Vanguard, attributed the firm's rise in assets to plan sponsors' fee sensitivity and search for strong brands with low costs and low tracking error in the index space.“Plan sponsors are acutely aware of how much fees are eating into (participants') accounts,” Mr. Jestice said. Factors such as the current low-yield environment and fee-related litigation have heightened their scrutiny, he added.
In addition to being the largest mutual fund manager, Vanguard remained the largest target-date manager with $278.3 billion in assets as of June 30, up 25.65% from 2015.
Jeff Holt, associate director, manager research at Morningstar Inc. in Chicago, said plan sponsors' focus on fees has been a tailwind for Vanguard's target-date business.
Plan sponsors want to default participants into something attractively priced, and Vanguard's use of underlying index funds in its target-date strategies helps keep fees low, he said.
Passive target-date strategies have been “riding a wave of popularity over the last five years,” said Micah Fannin, partner and senior investment consultant at Mercer Investments in Chicago. Plan sponsors are searching for simplicity, low fees and broad diversification, and passive strategies “kind of hit on all of those fronts,” Mr. Fannin said.
Fidelity held onto the No. 2 spot on the target-date ranking, despite a 2.3% drop in assets to $161.2 billion. (Mutual funds, commingled trusts and separate accounts are included under the target-date total).
Mr. Holt said Fidelity's target-date business has experienced net outflows in recent years, mostly from its Freedom target-date series, which he believes were driven by a “rough patch of performance” combined with underlying fund and glidepath changes. Fidelity's Freedom series invests primarily in active strategies.
Responding to a request for comment on Fidelity's mutual fund and target-date decline in this year's survey, spokeswoman Nicole Goodnow said in an e-mailed statement that Fidelity's “focus is on delivering the best customer experience and helping plan sponsors and their participants achieve better outcomes, not on being the biggest provider.”
“Fidelity provides an open architecture platform, and our clients can select from hundreds of different funds to create the fund lineup that meets the needs of their workforce and the objectives of their plan,” Ms. Goodnow wrote. “A number of macro trends continue to impact the DC industry, including an increase in custom/white-label products and a migration to institutionally-priced and passive products. We believe that while many of these trends give our clients the optimal flexibility, some may be cyclical in nature.”
Retaining its third place position on the target-date ranking was T. Rowe Price Group Inc., Baltimore, with $153.7 billion, up 10.1% from last year. Like Fidelity, T. Rowe Price's legacy target-date series are primarily actively managed.
Mr. Holt said Vanguard, Fidelity and T. Rowe Price's place at the top was unsurprising given they are three large record keepers.
When the Pension Protection Act passed in 2006, formally authorizing the use of target-date strategies as a qualified default investment option, many plan sponsors selected their record keeper's target-date series, Mr. Holt said.
Rounding out the top five on the target-date list and maintaining their 2015 positions were BlackRock (BLK) Inc. (BLK), New York, in fourth with $106.7 billion, up 3%; and J.P. Morgan Asset Management (JPM), New York, in fifth with $82.2 billion, up 22.7%.
Combined, the 20 largest managers of proprietary target-date strategies managed $997.7 billion as of June 30, up 10.5% from a year earlier. The overall figure for the top 20 is affected by John Hancock Funds, Boston, which did not participate in the 2015 survey, and State Street Global Advisors, Boston, which did not participate in the 2016 survey. (John Hancock and SSgA were removed from the top 20 for the year-over-year comparison.)
As the prominent default investment option, target-date funds “have a clear runway for growth,” Mr. Holt said.
Walt Best, institutional national sales manager at Capital Group Cos., attributed the firm's target-date increase in part to the popularity of target-date strategies as a default investment option.
The Los-Angeles based firm, which offers the American Funds family, saw its target-date assets rise 38.2% to $34.4 billion in the year ended June 30.
Strong underlying funds and a unique glidepath that looks at both growth equity and dividend-producing equity also makes Capital Group's target-date series attractive, Mr. Best said. It is also the least expensive actively managed series in the DC marketplace, he said.
Mr. Best added that the firm has benefited from the trend of unbundling record-keeper services from investment management. Although Capital Group provides some record-keeping services, its clients are on the smaller end of the market. Most of the asset growth has been on the investment-only side, Mr. Best said.
Regarding other DC trends, Mr. Best said that investment lineup simplification has helped and hindered the firm on the individual mutual fund side.
The group's American Funds tend to be core holdings, making it more likely they will be retained; however, with so many American Funds options out there, consolidation it not always in the firm's favor, he said.
Capital Group retained its spot as the third largest mutual fund manager despite a 1.4% decline in assets to $277 billion as of June 30. Following Capital Group and maintaining their 2015 positions were T. Rowe Price in fourth with $213.7 billion, down 1.1% from 2015, and J.P. Morgan Asset Management, in fifth with $94.1 billion, up 28.6% from the previous year.
The 25 largest managers of proprietary mutual funds for DC plans ran a combined $2.31 trillion in assets at the end of June, relatively unchanged from $2.33 billion a year earlier.
Mr. Best said that as the popularity of target-date strategies have increased, the popularity of stand-alone mutual funds has waned.
The overall figure for the top 25 was affected by Pacific Investment Management Co. LLC., Newport Beach, Calif., and John Hancock Funds, both of which participated in the 2016 survey but not in 2015. (PIMCO and John Hancock were removed from the top 25 for the year-over-year comparison.) P&I's survey also ranked the largest target-date managers by investment vehicle.
Joseph Martel, portfolio specialist and a member of the target-date investment team at T. Rowe Price, said he's noticed a desire among plan sponsors of all sizes to move to collective investment trusts from target-date mutual funds. Plan sponsors are now more comfortable with CIT's level of transparency and recognize the potential for cost savings, Mr. Martel said.
T. Rowe Price reported $38.3 billion in target-date commingled trusts as of June 30, up 32.5% from last year.
Not wanting to shut out new clients, many target-date managers now offer both mutual funds and commingled trusts, Morningstar's Mr. Holt said.
Ms. Goodnow noted that Fidelity recently reclassified some of its target-date vehicles, impacting its separate account and commingled trust ranking, for instance. To improve performance tracking, some separate accounts were reclassified as commingled trusts earlier this year, she said.
Mercer's Mr. Fannin said that once plan sponsors select a target-date manager, they tend to remain with that manager. If a switch occurs, it usually occurs because plan demographics changed, but those changes are infrequent, Mr. Fannin said.
Plan sponsors who feel they have a unique demographic may also consider adopting or including a custom target-date series, Mr. Fannin said. Custom target-date totals remained relatively unchanged in 2016 at $90.6 billion vs. $91 billion in 2015. (SSgA is excluded from the 2015 figure.)
T. Rowe Price's Mr. Martel said there has “always been chatter for custom (target-date strategies), but there haven't been a groundswell of plan sponsors” adopting them.
Barriers to custom target-date implementation cited by Messrs. Holt and Fannin included complexity and fees compared to the falling cost of off-the-shelf target-date strategies.